Significant 2021 Financial Services Industry Decisions and Legislation
In this 2021 year-end summary, the Financial Services Law Blog analyzes several of the most impactful financial services decisions and regulatory developments at both the national and local state level. 2021 was a year marked by several significant United States Supreme Court and other federal court decisions affecting financial servicing issues and legislation across the country and closer to home. Additionally, the impact of the CARES Act on mortgage servicing continued to play out, while the CFPB issued the important 2021 COVID Serving Rule amending Regulation X.
Split Supremes Hold Concrete Injury Was Required in FCRA Class Action Case
In June, the United States Supreme Court, in a split 5-4 decision reversing the Ninth Circuit Court of Appeals, affirmed the once fundamental – yet at one point, seemingly eroding – legal principle that a plaintiff must actually suffer harm before being able to sue on a federal statutory claim. The decision (TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 210 L. Ed. 2d 568 (2021)) reversed a $40 million class action judgment award based upon a finding that thousands of class members had demonstrated “no concrete harm” and therefore no standing for two of three Fair Credit Reporting (“FCRA”) claims.
Ramirez originated from the named plaintiff’s visit to a local car dealer. Mr. Ramirez had negotiated a price and even selected a color, the Court noted, before he was told that he was being denied financing because his name had showed up on an OFAC advisor “terrorist list.” He contacted TransUnion and was told that he in fact was listed as a “prohibited Specially Designated National (SDN).” Such designation was completely erroneous and was removed when Mr. Ramirez disputed it.
He sued on behalf of 8,185 class members, asserting claims that TransUnion failed to follow reasonable procedures to ensure the accuracy of credit files and also failed to provide consumers with complete credit files and a summary of rights upon request. The class was certified based on all of the class members having been falsely listed as prohibited SDNs, although only 1,853 of them had had their credit reports furnished to potential creditors. The Ninth Circuit found all of them had standing on these claims, disturbing the jury’s verdict and the magistrate’s judgment only insofar as to cut in half (as excessive) the $6,300-per-class-member punitive damages award.
But the Supreme Court reversed the judgment entirely, finding on the “reasonable procedures” claim that only the 1,853 class members whose credit reports had been provided to third parties actually suffered a concrete harm necessary for Article III standing. The Court also found that the class members other than Mr. Ramirez had failed to demonstrate any concrete harm with respect to the other claims.
The majority decision, penned by Brett Kavanaugh, contained the sound bite phrase, “No concrete harm, no standing.” The dissenting opinion, authored by Clarence Thomas, was grounded in disagreement on whether the class members had actually suffered a concrete harm, positing that a consumer’s receipt alone of an erroneous credit report should give rise to standing to sue on a FCRA claim.
Ramirez Decision Applied to Find No Sufficient Concrete Injury Allegation
The Ramirez decision was applied just weeks later in Grauman v. Equifax, No. 20-cv-3152, 2021 U.S. Dist. LEXIS 142845 (E.D.N.Y. July 16, 2021). In Grauman, although the plaintiff’s mortgage payments were suspended for a 2.5-month period in 2020, plaintiff continued to make his monthly mortgage payments on time. But his credit score suffered a 16-point drop, which he attributed to Well Fargo’s alleged improper reporting of his mortgage payment suspension.
Applying Ramirez, the court dismissed plaintiff’s FCRA claim for lack of subject matter jurisdiction, finding that plaintiff had failed to allege any concrete injury where there was no allegation of dissemination of his credit report to third parties.
Moratoriums and Modified Loss Mitigation Procedures under the CARES Act
Early in the COVID-19 pandemic in 2020, the CARES Act became law and established a foreclosure and eviction moratorium on federally backed mortgage loans. Section 4022 of the Act also provided for loan forbearance for borrowers on such loans “experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency.”
The federal foreclosure and eviction moratorium sunset at the end of July 2021. When Congress did not act to extend the eviction moratorium, the Centers for Disease Control purported to stand in for Congress and issue its own extension of the eviction moratorium. But that action was struck down by SCOTUS in August in Ala. Ass’n of Realtors v. HHS, 141 S. Ct. 2485, 210 L. Ed. 2d 856 (2021), on grounds that the CDC lacked the authority to issue such an extension. However, financial institutions and their counsel are advised to continue monitoring state-and-local-level limitations on evictions and foreclosures relating to the pandemic.
FHFA Structure Not Up to Constitutional Muster, Holds SCOTUS
Another significant but unsurprising Supreme Court decision came down in May – Collins v. Yellen, 141 S. Ct. 1761, 210 L. Ed. 2d 432 (2021). This decision held that the single-director, terminable only-for-cause structure of the Federal Housing Finance Agency (FHFA) was unconstitutional under the separation of powers clause, similar to last year’s CFPB decision.
The underlying lawsuit came from Texas and was brought by shareholders of Fannie Mae and Freddie Mac who alleged injury from a recent action of the FHFA Director that amended a purchase agreement in which the Treasury provided billions in capital in exchange for shares of Fannie and Freddie. Addressing, inter alia, the shareholder’s constitutional claim, the Court found the FHFA unconstitutional in its current form, particularly in light of the restriction in the 2008 Housing and Economy Recovery Act (which created the FHFA to oversee Fannie and Freddie) upon the President’s removal powers with respect to the FHFA Director.
Citing its 2020 Seila Law opinion regarding the unconstitutional structure of the CFPB,the Court reasoned that even “modest restrictions” on the President’s power to remove the head of an agency with a single top officer/director (here, of the FHFA) were unconstitutional. The case was affirmed in part, but reversed in part, and remanded to the district court for proceedings addressing whether the unconstitutional structure of the FHFA caused the shareholders’ alleged injury. Within hours, President Biden served walking papers on the previous FHFA Director Calabria and named Sandra Thompson as the new acting Director.
Kansas Ban on Credit Card Transaction Surcharges Found Unconstitutional
A February decision of the United States District Court for the District of Kansas found, for purposes of the plaintiff and transactions at issue in that case, that the 35-year-old Kansas “no-surcharge” statute was unconstitutional as a violation of plaintiff CardX, LLC’s First Amendment right to commercial speech. The statute, K.S.A. 16-a-2-403, provides that “no seller or lessor in any sales or lease transaction or any credit or debit card issuer may impose a surcharge on a card holder who elects to use a credit or debit card in lieu of payment by cash, check or similar means.”
In CardX, LLC v. Schmidt, 522 F. Supp. 3d 929 (D. Kan. 2021), the court found the statute violative of the First Amendment and all three factors of the United States Supreme Court’s test (as set forth in Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557, 561 (1980)) for determining the constitutionality of a statute restricting commercial speech. The court further (1) cited the need for surcharges to protect businesses with small profit margins from bearing the cost and burden of transaction fees imposed by credit card providers and (2) reasoned that the restriction placed an undue burden on merchants given the heightened demand for contact-free transactions in the COVID era.
While CardX was being decided, Kansas HB 2316 was introduced and would lift the statutory surcharge ban. That bill has since passed the Kansas House and has been referred to a Kansas Senate committee, where it currently sits. As noted in our April 2021 blog post, in the event that this bill does not pass the Kansas legislature, additional challenges to the current no-surcharge statute can be fully expected.